Diageo believes Brazilian buy will make it 'relevant' spirits player in country

Diageo says its acquisition of premium ‘cachaça’ (Brazilian rum) brand Ypioca makes it a ‘relevant’ player in Brazilian spirits and will allow it to boost sales of other key brands such as Smirnoff.

The cash deal of around R$900m (€359m) is expected to complete in a month’s time – BeverageDaily.com understands that no regulatory problems are expected – will broaden Diageo’s access to a growing middle-class in Brazil “who are driving the growth of premium brands”.​

Randy Millian, Diageo president, Latin America and Caribbean, said Ypioca would make Diageo a “relevant player in the largest local spirits category in Brazil, where we currently don’t really participate. Our Nega Fulo brand has less than approximately 10k cases of volume that would have taken many years to build”.​

Cachaça is usually 38-48% alcohol by volume (ABV), and differs from standard rum in that (whereas rum is usually made from molasses) cachaça is made from fermented and distilled fresh sugarcane juice, hence 'Brazilian rum'.

As Brazil’s national drink, it dominates the nation’s spirits category: 86m 9-litre cases sold per year accounting for 80% of spirits volumes, but only 6% of total annual beverage alcohol sales (R$9bn), which are dominated by beer.

'Underinvested' Cachaça category​

Millian said Diageo saw Cachaça as an “underinvested category in terms of A&P (advertising and promotions), which gives us an opportunity to grow share within the category…as Yipioca has traditionally focused on commercial execution instead of brand-building initiatives”.​

Ypioca was sold at a premium vis-a-visa rival cachaça brands – R$9 for Contagota Silver/Gold versus R$6 for category leader 51, and tapped the Brazilian consumer desire for premium brands, he added.

Rival cachaça brands include Five-One and Pita, which both beat Ypioca in volume terms, where it holds an 8% market share with just over 6.6m 9-litre cases sold each year.

But the brand is number two in value sales as the top premium brand (a 62% market share in this niche) with net sales of R$177m (€70.7m) in December 2011.

“Premiumisation and pricing is key as the overall cachaça category has seen double-digit revenue growth over the last few years due to improved price/mix and despite the slight volume decrease at the same time,”​ Millian said.

Driving Smirnoff sales​

BeverageDaily.com understands that Diageo brands now established in Brazil, notably Smirnoff vodka, Smirnoff Ice and Johnnie Walker Red Label are especially strong in the Southeast.

Ypioca’s strong sales and distribution network in Northeast Brazil (circa. 80% of sales here), coupled with access to 256,000 retail outlets nationwide (against Diageo’s current 160,000) means that the multinational sees the purchase as a means of boosting group sales across Brazil.

Seventy per cent of Ypioca sales are in its home state of Ceará, and Millian said: “This creates an opportunity to drive sales of Diageo brands in this state such as Smirnoff Ice, and to innovate with smaller formats for current Diageo brands,”​ Millian said.

Attractive demographics for Brazil – the world’s sixth-largest economy with a CAGR of 4% for the next five years – include 50% of the population under 29 years old, progressive urbanisation and the World Cup and Olympic Games looming in 2014 and 2016.